for a business process central to effective liquidity management, treasury
management system (TMS) based cash forecasting is often not implemented in
corporate treasuries, despite the benefits achievable. They include effective
interest-optimised cash management, securing dependable liquidity, early
identification of significant business cycle changes and protecting income and
The Historical Background
Collection, analysis and reporting of a corporate’s cash forecast would seem a
natural business function for the application of specialist treasury management
technology. Yet many corporates with TMSs continue to use spreadsheet-based
solutions for this fundamental cash and treasury management business function.
These operate externally to the TMS, and may not always be properly integrated.
So the organisation’s treasury technology investment is under-utilised; resulting
in an operating environment prone to the risks of integrity, security, control
and expert functionality associated with spreadsheet solutions. In operations
managing significant liquidity risk levels, such situations fall short of
industry best practice and can attract adverse audit reports.
Add to that the many treasury departments still using spreadsheets as their
primary technology, and the scale of contemporary spreadsheet usage for cash
forecasting becomes evident.
Why is this? When corporate treasury emerged as a distinct function within
finance departments, the largest corporations tended to adopt banking
technology solutions for treasury support, or built their own systems in-house
following the banking model. Cash management, particularly forecasting, was not
addressed – except peripherally as part of the deal settlement process. Potential
alternatives, accounting and enterprise resource planning (ERP) systems did not
accommodate cash forecasting, as their design focused on committed payables and
receivables (APs/ARs) but not the forward-looking nature of forecasting. There
is an uncertainty about forecasting incompatible with the current and
historical analytical framework of accounting.
So treasurers and cash mangers turned to spreadsheets for a forecasting
solution; their great value being exceptional flexibility – a key requirement
in constructing an effective forecast process and report for any organisation.
the inevitable complexities of working throughout the enterprise – a common feature
of forecast construction – and reasons for the persistence of spreadsheet-based
forecasting become more apparent.
For all the perceived inadequacies of spreadsheets, many treasuries believe the
effort and cost of implementing more robust, functionally rich TMS forecasting
solutions mean that projects struggle to gain highly priority in automation
plans and budgets.
Content Framework of a TMS Cash Forecast
This section reviews the most widely adopted global approach to cash
forecasting – that based on commercial estimates of future cash flows.
The foundation for a company’s cash forecast is the current cash position. This
is derived by consolidating the bank position constructed from the reconciled
bank account balances with maturing treasury transaction cash flows, such as those
relating to loans, deposits and foreign exchange (FX) forward contracts. In a
TMS, the position may be updated in real time with the application of new
treasury transactions, sometimes with other cash flows and intra-day bank
There is no clear boundary between the cash position and cash forecast, the
former reflecting a degree of committed future flows such as foreign currency
settlements. Arguably, the cash position is transitioned into a forecast with
the application of AP/AR data. This requires importing information originating from
or stored within the ERP and accounting systems, and integration can prove
complex. This is a classic requirement for specialist technology, especially
when numerous data source systems, including multiple ERP system instances, must
be accommodated. Integration can require the translation of multiple input
formats, which inevitably change periodically when the source system structure
is modified or upgraded.
In practice, some TMSs were not designed to manage high volumes of data typically
encountered in AP/AR files; in such cases the information needs to be
consolidated into summary format in the extraction process.
So far, the forecast framework is based on tangible future financial flow
information that probably will not change before actualisation. Additional data
that may be required for a full forecast stems from commercially-based estimates
of future cash inflows/outflows. This data, sourced from throughout the
enterprise, may be formatted and transmitted by various means. Sometimes,
budgetary data consolidated in the finance department is integrated into the
forecast. Often, the source media for import to the TMS is spreadsheets or
other kinds of files; there may well be tangible process benefits achievable
Structural Framework of the Forecast Report
So flexibility is a critical factor for the forecast construction process. In
practice, any two companies’ optimal cash forecast structures are unlikely to
be identical – even in the same industry. The monthly business patterns of an
oil company or airline may result in a predictable cash flow projection, but events
such as paying for a new refinery or aircraft obviously impact heavily on cash
The sources and result presentation for the cash forecast can differ, depending
on whether the company is cash rich or highly leveraged. The situation can
swing dramatically, for example following corporate actions such as acquisitions
and subsidiary disposals. A strong TMS solution offers flexibility to cater for
Effective cash forecast automation includes functionality to manage multiple
dimensions of analysis and reporting, depending on the corporate and its
business’ characteristic cycles and patterns. So the forecast may be
conveniently expressed at multiple levels, such as by operating company,
currency, geographic area or business group; the TMS solution should mimic the
data management flexibility and presentation options of a spreadsheet.
The time horizons for cash forecasts are radically different across the global
corporate spectrum. In extreme cases, forecasting may only be dependable out to
one week, while other operations will have a more predictable grasp of future
sales revenues, costs and expenses.
Modern TMSs cash forecasting solutions may be described as ‘configurable’ if
they include user-friendly functionality to initially set up the forecast. They
must also be able to modify or develop the forecasting framework efficiently in
response to changes in content, time horizon, analysis and reporting. What does
this mean for the treasurer? In practice, execution of changes should be easily
performed by treasury teams, not by technologists. The treasurer should be able
to build and modify the forecast process, structure and presentation easily in
response to a rapidly changing environment and management’s new process,
analytical or reporting demands. In organisations where effective liquidity
management is treasury’s primary goal, the TMS provides the most secure means
of achieving this through dependable cash forecasting.
Exchange Conversion Implications
A further demand on forecasting technology is the effective application of
exchange rates in forecast consolidation. A multinational corporation (MNC) is
unlikely to want all commercial cash flow forecasts submitted in the group base
currency, due to possible lack of control of the exchange rates used. The most
dependable process is for cash forecasts to be submitted in the native currency
of the projected inflow/outflow. A core TMS strength is the automated import
and application of current FX rates, enabling forecasts to be reported in their
native currencies. The TMS will automatically perform exchange conversions to
consolidate the foreign currency results into the group base currency, so treasury
has visibility of the evolving liquidity outlook.
Is the Forecast up to date?
Forecast operational and market risk can be significantly reduced through the
advanced TMS functionality of automatically updating the database and published
forecast, whenever relevant new information is entered. This level of
hands-free automation allows cash managers to treat the forecast with greater
confidence than if manual actions are needed for updating. The team is
liberated from unproductive data management chores and the risk of error
reduced, allowing more value-added professional cash management activity.
Business Unit Forecast Management
The key to accurate cash forecasting lies in securing dependable forecasts of future
inflows/outflows expected from the organisation’s sales and production
commercial activities. This is a general issue for MNCs and major domestic
corporations – and a perpetual headache for corporate treasurers and finance
Forecast submission methodology has progressed from fax to the internet, although
older technologies remain in some sectors. The value of contemporary TMS
technology is seen in an effectiveness comparison between these methodologies.
Older technologies lack the automated monitoring, control and feedback
communication offered by a TMS. This means that group and regional treasuries
may expend much effort in ensuring they have received all significant forecasts
from across the organisation. In contrast the TMS can operate a continuous
forecast receipt monitoring process, to automatically initiate follow-up and
alerting processes until completion.
Further TMS related benefits can be achieved in this area. Some internet-based
forecast solutions include flexibility in managing the forecast templates, so additional
information can be communicated beyond the basic data set of currency, amount
and anticipated value date. Such facilities can enrich forecast analysis; for
example by adding forecast actualisation probability. Templates may include
local language field labels and instructions. The technical nature of the solution
means it can manage updates 24/7. These automation functions add significant
value to large, complex treasury operations.
Historical and Statistical Forecasting Methods
Having reviewed cash forecasts constructed via commercial business forecasts collected
from across the organisation, many North American corporations employ an
alternative approach, based on analysing historical cash flow information and its
projection into the future. This methodology requires effective TMS support for
collecting storing large volumes of information, and for subsequent statistical
Initial implementation of this solution requires the import of sufficient historical
information for valid analysis. Where unavailable – or if the TMS technology is
not up to the task – means waiting while perhaps a year’s data is accumulated so
meaningful forecasting is possible.
The computational and logical processes for constructing statistical cash
forecasts are challenging. The forecast quantifies cash surpluses and
shortfalls projected over a pre-defined future term, based on historical analysis.
This can prove fairly sophisticated, providing variance estimates within
probability limits, and taking into account secular trends such as inflation
and potential changes in business cycle changes.
Statistical forecasting, based on analysis of historical data, is often combined
with forecasting based on business units’ submissions, to provide comparative
possibilities in analysing the corporate liquidity outlook.
Forecast Analysis, Performance
Measurement and Benchmarking
Short term cash forecasting provides clear liquidity benefits towards precise
planning of cost- effective short term borrowing and investment activities.
Medium term cash forecasting can have a beneficial impact, which impacts and overlaps
with funding strategy – potentially with more profound implications. An illustration
of this was provided by an MNC manufacturing machinery and tools for the
construction industry. The company used powerful cash forecasting technology
and one month’s reporting showed a sharp discrepancy between the
historically-based forecast and much lower revenue forecasts from the North American
sales force. Having verified the accuracy of calculating these sharply
divergent results treasury alerted management, which immediately researched the
sales forecasts. These revealed a serious fall-off in orders. Once this finding
was validated the company chose urgent refinancing as an appropriate risk
mitigation exercise; the potential scale of the forecast business contraction threatening
corporate liquidity, profitability and even survival. The company negotiated a
medium term refinancing, enabling it to navigate the subsequent construction
industry downturn. Advanced use of forecasting technology had a substantial
impact on corporate performance, as it transpired that they had located and
quantified a leading indicator of the 2008 global financial crisis.
Applying TMS cash forecasting technology has much to offer in achieving corporate
treasury best practice. Technology provides a means of measuring the quality of
forecast performance, against pre-defined benchmarks. By contrast, a manual
alternative would be prohibitively time consuming and expensive to execute with
Such analysis is often performed through definition and operation of treasury key
performance indicators (KPIs). A typical cash forecasting KPI shows the
variation between actual and forecasted cash flows, expressed in both absolute
money and percentage terms. It can be used to track forecast quality
performance among subsidiaries and other units, as part of a process
improvement exercise. A function of treasury policy is determining how the
results of such powerful analysis are put into practice. An in-house bank (IHB)
might, for example, apply a premium to the interest rate charged to the
subsidiary’s internal account, were it to fund an unexpected significant cash
shortfall. Effective application of technology can encourage and reward good
forecasting performance, benefiting corporate liquidity management quality.
Cash Forecasting in the Daily Treasury Workflow
Automated cash forecasting can add significant value to managing short and
medium term liquidity. The benefits can extend to identifying secular changes
in core business patterns, providing the opportunity to be proactive in
managing new, unanticipated business challenges. In general, strong forecasting
is a key element of effective treasury management, encompassing efficient cash
mobilisation and strategic funding, investment and risk mitigation.
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